I’m thinking that if I wanted to cement my standing as the reigning anti-corruption iconoclast, a headline like this one would do it. In the face of the indefensible, let me offer a defense. Or, at least, some mitigating facts which you should take into account.
The overriding thing I thought of when I read the New York Times article was a quote from the New Testament:
“When they kept on questioning him, he straightened up and said to them, “Let any one of you who is without sin be the first to throw a stone at her.”
I remember the first thing I thought of when I heard about the Madoff case, and how it was a closed investigation that came back to bite someone. I thought, “please Lord, let it not be one of my closed cases.” Because I knew that it could have been me, easy peasey.
For all the trashing of Wal-Mart that’s going on right now, let he who is without sin cast the first stone.
Because while I don’t agree with the FCPA Professor—shocking, I know—that there was barely a violation, I do believe that Wal-Mart’s actions weren’t as uncommon as you’d think. Parts of them, anyway. Let me explain.
I would guess that about 95% of corporate internal investigations remain undisclosed to the regulators. That number may be a bit low. And while the allegations that the Mexican subsidiary—it’s not really a subsidiary, I suspect, as it’s all just Wal-Mart—changed the reports, and then got assigned, and quickly scuttled, the investigation seem pretty bad, it’s not something that doesn’t happen, and more frequently than you’d think.
So what’s the normal path of an investigation?
Let me digress here for one minute to disclose my own bias. My background is in prosecuting, and later in creating and managing compliance programs for, large multinational corporations. My bias when I describe investigations—and compliance in general—is to describe life in large corporations. Not just the ones I’ve worked at, but at others against whom I’ve benchmarked and with whose compliance officers I’ve spoken informally. But even then, my extended experience is similarly with large corporations. Keep that in mind.
The normal investigation path is this: something comes to the attention of legal or compliance. This can be just about anything: a call from the Wall Street Journal, a formal whistleblower complaint, a “quick question” from someone in the field, or an email.
Assuming that the person receiving the initial information works in the general area of the complaint, he or she might do a little preliminary digging to see if there’s anything worth really looking into. Just a couple of phone calls, or checking generally available company resources (like who reports to whom kind of stuff). Then, thinking, “oh, crap!” the person goes to his or her boss and says, “here’s a new issue; I think we need to look into this.”
The case then gets sent to someone to investigate. Some companies have dedicated investigation resources, some don’t. Assuming not—I tend to think it’s rarer to have a dedicated investigation staff than not to have one—the person doing the investigation will be in legal or compliance for the affected business unit. That person may or may not have real investigative experience. Conducting an investigation isn’t something that comes naturally, even to lawyers. It’s a skill, and like all skills, disuse causes atrophy. This assumes, of course, that the person doing the investigating ever knew how to do it properly. I’ve seen people conduct interviews, and it’s often a combination of NYPD Blue episodes, Matlock, and Columbo. I learned from the best, starting with Bronx ADAs Linda Tacoma and Bill Zelenka and going through to some incredible people at the SEC. I learned the art—yes, it’s an art—of the interview from a couple of first-grade detectives, and plenty of second-grade detectives (first and second grade are ranks within the detective bureau; first-grade detectives are the best of the best that the NYPD has to offer).
But since I don’t do it every day, I’m incredibly rusty. If I were to start up again, my first 10-20 interviews would be awful. This is my point: a lot of times the person doing the investigating isn’t an investigator. Besides that this kind of investigation is even more difficult: multi-national, different languages, specialized financial knowledge. How many lawyers had even heard of the term “gestores” before the article?
Of course, Wal-Mart had internal investigators, but the unit was mired in political haggling. I’m sorry, but that doesn’t particularly shock me either. If you don’t think there are politics flying around during an investigation, especially an investigation of a high-performing person or unit, you’re out of your mind. And remember the all-important distinction: investigators are a cost center. Wal-Mex was a profit center, and an important one at that. So those investigators had the chips stacked against them to begin with.
Even so, they found enough to generate some worry. Here’s where there are some things we don’t know. Were the results ever disclosed to the Chief Compliance Officer? Did the CCO go to the Board?
In any event, they reassigned the investigation back to the Mexican subsidiary. It’s hard to see the thought process behind that, now that we know how things turned out. On the front end of that decision, who better to investigate the alleged misconduct within the Mexican subsidiary than the people who traditionally probably did investigations in Mexico? One of the key questions, from a blame perspective, is what did the person who made that decision know before he or she made it. Was that decision-maker aware of specific and credible information linking the illegal conduct with the person proposed as the new investigator? If so, that’s a bigger problem. I suspect, however, that it’ll be somewhat less black-and-white than that.
Once the investigation got turned over to the people allegedly involved in the wrongdoing, it’s clear to us that the investigation would be scrapped. But that’s a certainty that comes again from hindsight.
And corporate headquarters took that conclusion and said, “fine, we’re closing this out.” Again, in hindsight, that looks horribly bad. But look at it from their perspective: they turned over the investigation to the proper in-country team, and heard back that there were no issues. What was HQ supposed to do? Yes, certain people within Wal-Mart knew that the watchers needed watching, and it’s an open question who knew what, and when.
Again, what doesn’t shock me is that an investigation—even one started with serious allegations—ended internally.
Because let’s face it, what if they had found illicit conduct? Does that mean that there’d be an automatic self-disclosure to the regulators? Not on your life. Investigations that end with a finding of wrongdoing are hardly ever reported to the government. I think the small subset of self-disclosed internal investigations generally get reported because there’s a calculus that they can’t keep it quiet.
I think “we’ll be found out” is more of a self-disclosure motivator than “we did something wrong.”
Normally, investigations where wrongdoing was found end with some sort of discipline against the offending party, some remedial actions like additional training, maybe a change in controls, and likely an increased audit periodicity. Maybe suspension or, less likely, termination for an employee. A low-ranking employee. Rarely, if ever, a high-ranking one. And a high-performer? Almost never.
Do I sound a bit cynical? Maybe so.
So the investigation ends. And the question is raised: do we self-disclose?
Ask any outside counsel and certainly any in-house counsel whether their default position is disclose or not to disclose, and you’re sure to hear “not to disclose.” I don’t know whether, when push comes to shove, that opinion holds up, but it’s certainly the starting point.
A colleague of mine put it very well: not disclosing is like loading one bullet in a gun with 1,000 chambers and pointing it at your head; disclosing is like putting six bullets in a six-shooter, and pointing it at your leg.
You have a 1-in-1,000 chance of getting found out—like Wal-Mart just has been—and suffering a worse fate (like they will). Those are betting odds. But disclosing? You’ll definitely get stung.
Most companies facing that decision will take the odds.
As did Wal-Mart, according to the article.
Some of what was reported seemed pretty bad. I don’t think it spells the death knell for the reform-the-FCPA movement. Nor do I think that it’s another example of the need to eliminate corporate subsidiary liability.
I think that it’s nothing out of the ordinary. A company conducted an investigation, decided there was nothing to the charges, and didn’t disclose.
Happens every day.
Post Script: One personal story about Wal-Mart. Several years ago, I reached out to one of their anti-corruption people—at the time, it was a guy named Martin Montes—to benchmark. Incredibly generous. So much so, in fact, that two of our people got invited to Bentonville to see it firsthand. I forget why I couldn’t go, but there was some conflict that sent two others instead of me. Our people went down there and saw how they worked. They were open with their processes and policies, and it really helped in the development of our program.